R. Donahue Peebles built the largest African American-owned real estate development firm in the U.S. by mastering the art of taking risk -- but not too much risk.
As told to John Fried
In the early '90s, R. Donahue Peebles was a powerful player in real estate development in Washington, D.C., but hardly a national figure. Then, on a family vacation in Miami, he decided to bid on the redevelopment of the grand but tired Royal Palms, a 417-room resort at the end of South Beach's wealthy Ocean Drive. It was an arduous project that would take six years to complete, but it was also one in which Peebles would break new ground -- the Royal Palm Crowne Plaza became the first African American-owned resort in the U.S. It's now the second largest hotel on South Beach and brought in $16.4 million in revenue in 2003. Equally important, the project solidified Peebles's reputation as an aggressive and politically savvy businessman and one of the most powerful players in the ranks of South Florida developers.
Today, Peebles's Atlantic Development Corp. is the largest African American-owned development firm in the U.S., with real estate holdings valued at approximately $500 million. His Residences at the Bath Club, a condo project that has transformed the oldest social club on Miami Beach's Millionaire's Row, is set to open this month, offering 112 units valued at up to $10 million each. He's also negotiating new projects in Las Vegas and the San Francisco Bay area.
I was inducted into the real estate business as a child. My mother was a secretary, but she went to night school to get her brokerage license and worked as a sales agent. Later, she opened her own real estate brokerage firm. During the summer of my senior year of high school, I worked with her appraising homes, learning the business. I also worked on Capitol Hill as a page and as an intern for two congressmen, Rep. John Conyers of Michigan and Rep. Ron Dellums of California. I had a pretty grueling schedule, but I got to see how politics and business interacted.
Going to college was a letdown for me. I went to Rutgers for a year because I wanted to be a physician. I wanted to help people and make a nice living, but I had already been working for years, making money. Real estate had low barriers of entry, so I left college after one year and took courses on appraising and real estate transactions. In 1979, I worked as a sales agent and appraiser at a particularly sluggish time in real estate -- interests rates were around 18% -- but I was getting experience.
I developed some relationships working on Capitol Hill that I maintained as I went into the business world. In 1982, there was an opening on the city property tax appeal board, an influential group that reviewed assessment values of D.C. real estate and had the authority to give out $50 million to $60 million in tax rebates annually. I knew Marion Barry, then mayor of Washington, D.C., who got me the opportunity to submit my qualifications to the board. I was appointed when I was 23. It gave me the kind of knowledge that would have taken years to acquire in the private sector. By the time I was 24, I was chairman of the board.
A real estate broker I knew from the tax appeal board told me about a client who had a property in Anacostia, a depressed commercial district in D.C. The client and developer were unable to agree on a price. The seller wanted $900,000; the developer was willing to pay $750,000. I had been working on another project that hadn't gotten off the ground, but I thought my investors might be interested in Anacostia. This led to the purchase of my first building, a 100,000-square-foot property.
I learned a critical lesson in this first deal -- you have to understand what the other side wants and you should try to give it to them. I was able to get the deal because I paid full price. My partners and I have made over $10 million on that property, and it's still throwing off cash. Your margins shouldn't be so tight that you have to count pennies.
The Royal Palm deal taught me to focus on competitive environments where other developers are pursuing the same thing. It's got to be competitive. And in the mid-'90s, the real estate market in Miami was hot. The Royal Palm was an endurance test. The site had contaminated soil. One of the buildings was structurally deficient because it had been exposed to the elements too long. The city ended up condemning it. We had to tear it down and build an exact replica. We initially envisioned a $64 million hotel, but it ended up costing $80 million. Until then, I had never had to go back to my lenders to ask for more money for a project. And we opened right after 9/11. Many developers would have walked, but we were going to finish it, even if we lost money, not only because of the financial responsibility, but because of the moral responsibility as well.
We're known as a conservative development company, but I think we're big risk takers. When we consider a project, we assign it a dollar amount, forecast the rewards if we are successful, and decide what financial risk we are willing to take up front. If we do it, we don't look back. We don't go out into the capital markets to finance our projects until after the expiration of that risk, which allows us to own a far greater percentage of our buildings.
The Bath Club, for instance, was in financial trouble. Its loan was maturing and it was delinquent on its property taxes. The owners were asking for $25 million to $30 million, but no one was willing to pay because it wasn't going to make money unless it got rezoned -- the building couldn't be taller than 40 feet. The rezoning would take two years. I found a loophole that would allow us to go up to 200 feet in height and offered $10 million, contingent on the rezoning. So I was able to quantify my risk as a dollar amount. Large companies aren't willing to do that, but our philosophy is to take the early risk as long as we think we will get rewarded for it. After the Bath Club got rezoned, a brokerage firm offered me $42 million for the property.
I take being a minority businessperson as a responsibility. My grandfather was a doorman for 40 years at a Marriott in D.C. And I'm going to give opportunities to minorities and women, both of whom are underrepresented in my industry. But all too frequently people come up with excuses as to why they can't succeed. They say it's too difficult. They can't get a job. They end up giving up their goals before they have a chance to fulfill them. I could have made a lot of excuses in my career, but the No.1 ingredient to success is to not accept failure.
Read an extended interview with R. Donahue Peebles at www.inc.com/keyword/howididit.